First-Price Bidding and Entry Behavior in a Sequential Procurement Auction Model

We introduce a procurement auction model where capacity-constrained firms face a sequence of two procurement auctions, each of them in the first-price sealed-bid design. Our main findings are that the firms’ entry decisions depend on relative project completion cost levels and that equilibrium bidding in both auction stages deviates from the standard Symmetric Independent Private Value auction model (SIPV) due to opportunity costs of bidding created by possibly employed capacity. The model highlights the fact that firms with identical completion costs for the first project may differ in entry and bidding strategies. In addition, experimental data is reported in order to assess the predictive power of the model.